Car loan delinquency and chargeoff rates are on the rise, ratings agencies report, as increased competition forces some banks to dig deeper into the credit spectrum to generate business.
Auto loan losses jumped 30% from last June to March, said Moody's Investors Service. According to the ratings agency's index of losses at major auto lenders, loss rates reached as high as 1.68% in February-the highest since the last recession.
"Loan performances have been weaker than expected," said Christina A. Cotton, senior credit officer at Moody's.
The source of the rising losses, she said, is similar to what's driving up credit card chargeoffs: More credit is being offered to more people who traditionally could not qualify.
Regional Financial Associates, West Chester, Pa., said nearly $376 billion of auto credits were outstanding at the end of the first quarter, a 34% increase since the beginning of 1994.
The rising losses that Moody's reported are "not unexpected" given that lenders industrywide are loosening standards to stay competitive, said Mark M. Zandi, chief economist at Regional Financial Associates.
"Perhaps lenders will tighten standards and slow the growth of lending," he said. "It might be therapeutic."
Bankers counter that the world of auto finance has gotten more competitive than ever in recent years with the rise of independent auto financiers. That makes generating more loans crucial for maintaining market share.
"This is a competitive market," said Dan Winkler, chief executive of Finance One, a subsidiary of Banc One Corp. "No one outside the (auto makers) has more than 2% market share."
Although banks insist they still focus on customers with good credit- only 1.8% of Banc One's $17 billion auto loan portfolio is subprime-they have responded to the growth of independent auto finance companies by imitating a few of their tricks.
Companies like Union Acceptance Corp. and Arcadia Financial Ltd., which specialize in making auto loans to consumers who could qualify for bank loans, attract business by offering longer terms and lower monthly payments. Banks, ratings agency analysts said, have been forced to follow suit.
The rapid rise in auto leasing programs also has forced banks to start making loans for more used cars coming off leases. According to Moody's, 35% of the car loans in portfolios securitized by banks are for used cars, more than double the rate of 1994.
Consumers default on used-car loans more often than they do for new cars, said Ms. Cotton of Moody's.
To date, the rising chargeoffs have not caused problems for investors in prime-quality auto loan asset-backed securities, as they have in credit cards. Spreads have remained as tight as ever, traders said, and banks have taken steps ensure investor confidence by increasing reserves supporting the securities.
After its chargeoffs reached 2.36% this spring, Banc One deposited enough cash to boost reserves by 500 basis points.
But the rise in losses was caused less by lending practices than by the bank's consolidating its auto loan collection centers to four from 27, said Barrett Burns, chief credit officer at Banc One. "We knew there would be some pain when we did that," he said.